3Q22: Gaining Consistency; Scaling Greater Heights
OCBC’s net interest income grew 44% yoy, driven by a massive 54bp yoy NIM expansion in 3Q22. Other non-interest income, including insurance and net trading income, grew 13% yoy. This is the third consecutive quarter of excellence in execution and ROE has risen above 12%. We raise our earnings forecast by 7.8% for 2023 due to the rapid NIM expansion and improvement in cost-to-income ratio. OCBC provides a dividend yield of 4.7%/5.0% for 2022/2023. Maintain BUY. Target price: S$18.28.
• Oversea-Chinese Banking Corp (OCBC) reported net profit of S$1,605m for 3Q22 (up 31% yoy and up 8% qoq), above our forecast of S$1,417m.
• Net interest income crosses the S$2b mark with massive NIM expansion. Loans expanded 6% yoy and 2% qoq, driven by Singapore (+5% yoy), Indonesia (+5% yoy), Greater China (+4% yoy) and rest of the world (+20% yoy) (Australia, the UK and the US). NIM expanded a sizeable 54bp yoy and 35bp qoq to 2.06%, driven by higher asset yield across key markets, which outpaced the rise in funding cost. Net interest income grew 44% yoy to S$2,099m.
• Severe contraction in market-sensitive sources of fee income. Fees declined 20% yoy and 5% qoq. Contribution from wealth management dropped 40% yoy due to a subdued investment climate. AUM was flat yoy and qoq at S$250b. Similarly, contributions from brokerage & fund management declined 22% yoy.
• Other non-interest income grew 13% yoy. Contributions from life and general insurance were resilient at S$318m, up 21% yoy, due to net mark-to-market gains from assets and liabilities of Greater Eastern’s insurance funds. Net trading income was strong at S$194m (+134% yoy) due to growth in customer flow treasury income.
• Cost-to-income improved 6.1ppt yoy to 40.3%. Operating expenses increased 7% yoy in 3Q22. Staff costs increased by 8% yoy due to annual salary increments and higher headcount to support business expansion.
• Asset quality has improved. NPL ratio receded 0.1ppt qoq to 1.2% in 3Q22 due to higher recoveries/upgrades of S$669m for corporate and consumer customers in Malaysia and Indonesia that exited relief programmes.
• Loan-loss coverage was healthy at 108%. Total provisions were S$154m in 3Q22 (1H22: S$116m). General provisions were S$76m with additional general provisions set aside for updates in macroeconomic Variables (MEV) model. Specific provisions included impairment of S$47m for OCBC’s overseas properties.
• OCBC achieved ROE of 12.4% for 3Q22. CET-1 CAR eased 0.5ppt qoq to 14.4%.